April 28 (Reuters) - Activist investor Starboard Value on Tuesday disclosed it has made a "substantial investment" in Dynatrace ( DT ), as it sees the software monitoring firm as undervalued despite its strong competitive positioning and long-term growth prospects.

Dynatrace ( DT ) shares rose more than 5% in premarket trading.

Starboard, in a letter to the company's top management and board, said Dynatrace ( DT ) had significant strategic value. It urged the company to accelerate margin expansion and return more capital to shareholders.

The hedge fund has already become one of Dynatrace's ( DT ) top five shareholders and has been engaging privately with the company's leadership in recent months.

Starboard said the company could boost adjusted operating margins by at least 500 basis points by fiscal 2029 through improved sales and marketing efficiency, better prioritization of research and development spending, and stronger operating leverage.

The hedge fund also said Dynatrace ( DT ) could repurchase more than $2.5 billion of shares over the next three years, equivalent to roughly 25% of its current market capitalization.

Dynatrace ( DT ) has been "incorrectly bucketed" by investors as exposed to AI-related risks, Starboard said in the letter, arguing that AI adoption should instead drive higher demand for its services.

"Enterprise adoption of AI should ultimately result in accelerating revenue growth for Dynatrace ( DT )," the fund said, citing the rising complexity of cloud, application and AI agent workloads that require end-to-end visibility.

Dynatrace ( DT ) shares have lagged the broader market and software peers over the past five years, according to Starboard, which said the stock trades at nearly half the valuation multiple of comparable infrastructure and cybersecurity companies despite similar revenue growth.

Shares of the AI software maker has fallen about 18% so far this year.